Webster Financial Corp (WBS) 2015 Q2 法說會逐字稿

Good morning, and welcome to Webster Financial Corporation's second-quarter 2015 results conference call.

This conference is being recorded.

Also, this presentation includes forward-looking statements within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to Webster's financial condition, results of operations, and business and financial performance.

Webster has based these forward-looking statements on current expectations and projections about future events.

Actual results might differ materially from the projected in the forward-looking statements.

Additional information concerning risks, uncertainties, assumptions, and other factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Webster Financial's public filings with the Securities and Exchange Commission, including our Form 8-K containing our earnings release for the second quarter of 2015.

I will now introduce your host, Jim Smith, Chairman and CEO of Webster.

Please go ahead, sir.

Thank you, Christine.

Good morning, everyone.

Thanks for joining us for Webster's second-quarter earnings call.

CFO Glenn MacInnes and I will review business and financial results and then take questions, along with President Joe Savage.

Beginning on slide 2, second-quarter results were solid, producing record net income and a 9% return on common shareholders' equity.

That's 12.5% on tangible common.

Our results showcase our progress in executing our strategic plan for growth, including achieving sustained momentum around the commercial banking expansion, rapid growth in HSA Bank footings, progress along the community bank transformational roadmap, and growing traction in the private bank.

I'm bullish on our prospects because I'm confident that we've made good just strategic choices that will create meaningful value for our customers and shareholders over the long-term.

And right now we are firing on all cylinders.

And we may get some help from a regional economy whose prospects seem to be improving according to the latest Fed Beige Book, which cites stable or improving business conditions in the first district, stronger retail, and an improving housing and commercial real estate market.

A common denominator in the quarter across all of our businesses was strong loan growth, with total loan originations of $1.5 billion setting a quarterly record, including a big uptick in first mortgage lending.

This robust loan volume drove higher net interest income that overcame net interest margin compression and helped produce 10% year-over-year core revenue growth, the 23rd consecutive quarter of year-over-year core revenue growth.

That's momentum.

There were two items of special note in the quarter.

First, we experienced a lower-than-expected tax rate from a net tax benefit of $3.7 million that Glenn will discuss.

And second, we increased the quarterly loan loss provision by $3 million in response to loan growth in excess of $500 million.

Given net charge-offs once again in the $7 million range, the result was a quarterly reserve build of about $6 million in the allowance for loan losses, which keeps our reserve to loans flat at 1.14%, and comfortably within our current desired range of 1.10% to 1.15%.

Glenn will discuss increases in commercial classified and nonperforming loans in his review of asset quality.

But I want to highlight a leading indicator of credit quality, loans more than 30 days past due, which declined to a remarkably low 22 basis points, down over 30% year-over-year.

All my further comments will be based on core operating earnings.

Turning to slide 3, you can see the recent quarterly trends for loans and deposits.

While loans have been growing briskly, core deposits have grown even faster, reducing reliance on borrowings and underscoring our balance sheet strength and strong liquidity position.

The loan to deposit ratio is 85% compared to 87% a year ago, largely because growth in HSA deposits is fully funding loan growth, and the borrowing to asset ratio is down to 16% compared to 18% a year ago.

Our balance sheet is well positioned for increases in interest rates.

On the loan side, more than 80% of C&I and commercial real estate loans are floating rate or repriced periodically, and virtually all of our $1.9 billion in home equity lines are floating rate.

On the deposit side, combined transactional and HSA deposits now represent 55% of total deposits compared to 47% a year ago.

I will provide more comments on loan growth when we get to the LOB slides.

On slide 4, strong loan growth approached 4%, linked quarter, and exceeded (technical difficulty) year, which contributed to another quarterly record for net interest income, with all loan segments posting year-over-year growth, and all but consumer in double digits.

Note the rebound in residential mortgage activity as our jumbo mortgage strategy positions mortgages as the lead product for building relationships.

Turning to slide 5, in addition to the quarterly record for net interest income, noninterest income grew 25% year-over-year to another record, aided by a 17% gain in loan fee revenue and reflecting in particular the recent HSA acquisition.

Noninterest expense growth also shows the effects of the HSA platform acquisition, which accounted for almost $10 million of the $15 million year-over-year increase.

Our ability to invest in strategies that create economic profit while diligently controlling expenses enabled us to achieve an efficiency ratio of 60% or better for the ninth straight quarter, which in turn produced a 6% increase in pre-provision net revenue, or PPNR.

Slide 6 shows the sustained revenue growth and expense discipline that have resulted in consistent growth in PPNR, and here you can see that year-to-date PPNR growth exceeded 8%.

Slide 7 breaks down the PPNR performance in the first half of 2015 compared to a year ago in our four lines of business.

As you see, commercial banking continues with double-digit PPNR growth, while HSA Bank benefits mightily from its strong organic growth and its recent acquisition.

Community banking is lower than prior year due to the effects of the persistent low interest rate environment.

(technical difficulty) linked quarter, driven by progress against our strategic roadmap initiatives that we covered in detail at our June Investor Day.

Private banking is poised to achieve breakout performance, as the model shift is complete and the foundation for success is firmly in place.

Line of business performance begins with slide 8. The slides speak for themselves, especially with regard to balance sheet and production metrics, so I will be brief.

Commercial banking continues to perform extremely well, growing loans, revenue, and economic profit while executing on its strategic initiatives of geographic expansion, leveraging industry expertise through specialization, relationship focus, and local model deal.

Loan growth and originations were spread across the business units in all geographies, as our bankers continued to attract new, well-known customers and excel in service to all customers.

The portfolio yield decline was attributable to continued pricing pressure on new originations and payoffs of mature, higher-yielding loans in the quarter.

Over half the fundings in Q2 were in middle market versus one-third in Q1, resulting in higher yields on new fundings, which at 3.46%, were 33 basis points higher than in Q1.

Transaction deposits were up 8% year-over-year on a comparison that eliminates the strong Q2 seasonal impact of government deposits, and demonstrates positive momentum in core deposit growth and relationship acquisition.

Moving to community banking, slide 9 shows that business banking is hitting its stride, generating continuing growth in the loan portfolio as originations picked up linked quarter, while the pipeline grew over 100%, both linked quarter and year-over-year.

Our recent initiative to cut loan approval time by over half is generating higher volumes.

Total deposits, DDAs, and fee income grew year-over-year and linked quarter.

Our focus on high-value relationships has been driving growth in average loan amounts, deposit balances, and fee-based services.

Looking at the personal banking unit on slide 10 and referring also to the mortgage origination trends on slide 11: stronger consumer lending, including home equity product, and much higher first mortgage loan originations boosted overall consumer loan balances, driving portfolio growth by 4.5% linked-quarter, and 9% year-over-year.

Our lending salesforce of 70-plus market-facing mortgage bankers, a 16-banker dedicated salesforce in our call center, and 700 nationally mortgaged -- licensed system bankers in our banking centers, and our correspondent partner channel, capitalized on the spring purchase mortgage market and improving consumer loan demand.

Residential mortgage originations exceeded $500 million, with 29% originated for sale and the balance for portfolio, of which 91% was jumbo relationship product related to our mass affluent segment focus.

The higher yield on these loans contributed to the 3 basis point linked-quarter increase in the overall yield on the $6 billion personal banking loan portfolio.

Overall personal banking deposits remained flat as growth in transaction balances offset a decline in CDs.

Transactions balances benefited from the strongest growth in net new checking accounts in five years, and average balances per account eclipsed their highest ever levels.

Investment assets under administration in our Webster Investment Services brokerage unit grew 3% year-over-year to $2.8 billion, while sales production grew 8%, linked quarter.

Slide 12 presents the results of HSA Bank, where the full-quarter effect of the mid-January acquisition of JPMorgan Chase's health savings account business is visible in Q2 results.

In HSA Bank's best second quarter ever, we opened 151,000 new accounts, more than four-fold the number opened last year.

This more than offset the expected roll-off in the quarter of acquired out-of-scope accounts, leading to a net gain of over 67,000 accounts.

Total footings now stand at $4.7 billion, including deposits of $3.7 billion, which represents about 21% of Webster's total deposits.

Excluding the acquisition, deposits grew 26% year-over-year, and accounts were up 36%, reflecting the importance of our multi-product strategy, now also including flexible spending accounts, health reimbursement accounts, and commuter benefits accounts, our extensive integrations with major health plans, and our success completing in the large employer channel.

In June, for example, we onboarded our largest employer to date, representing approximately 60,000 accounts and $70 million in deposits.

Large employer wins like this, and a 40,000 account relationship we landed in July, will cause spikes in our quarterly growth rates, but overall we're still in line with our 2015 account growth projection of about 25%.

As we noted during Investor Day, the market for consumer directed healthcare is projected to grow at a 20% compounded annual growth rate for several years, which presents significant upside for this business.

We completed the transition to the industry-leading Evolution1 platform for the legacy HSA Bank business last quarter.

The conversion of the JPMorgan Chase portfolio and health plan integrations are progressing well and on schedule.

When completed, the resulting scale and future growth will help lower unit costs and increase net revenue per account.

To give you a feel for HSA Bank's financial impact, including the acquisition, overall accounts increased to 160% year-over-year to 1.7 million.

Referring back to slide 7 for a moment, we can deduce that revenue in the quarter doubled to about $34 million, split 52% as net interest income, and 48% as fee revenue from card fees and account fees.

Expenses, including some conversion-related costs, increased about $10 million, as I noted, and segment PPNR grew around 75% to about $14 million.

Slide 13 summarizes results for Webster Private Bank.

The fully integrated offering we described at Investor Day continues to take hold, as can be seen by strong loan growth, aided by a newly streamlined, dedicated credit process and the increasing AUM pipeline.

We expect the growth at the private bank will accelerate from here as the new model and our capable bankers achieve their vast potential.

Now I will turn it over to Glenn for financial comments.

Thanks, Jim.

I will begin on slide 14, which summarizes our core earnings drivers.

Our average interest-earning assets grew $707 million compared the first quarter.

About three-quarters of the growth was attributable to our loan portfolio, with the remaining growth the result of incremental security purchases made during Q1 in connection with the HSA acquisition.

Net interest margin, at 305 basis points, was down 5 basis points from Q1.

The decline was within the anticipated range, but was primarily driven by lower securities in commercial loan yields.

Our 3.4% linked-quarter growth and earning assets, partially offset by NIM compression in the quarter, resulted in record net interest income of $163.5 million.

Core noninterest income increased by $1.6 million or 3% on a linked-quarter basis to establish a new high of $59.4 million.

Core expenses were up $4.1 million over Q1, primarily driven by increases in HSA Bank, annual merit increases, and stock-based compensation expense.

Taken together, our core pre-provision net revenue totaled $85.9 million, up 1% linked quarter, and 7% from prior year.

And as you see, we had a $3 million increase in our provision to $12.8 million this quarter.

Pre-tax GAAP reported income totaled $73.2 million for the quarter, up 3% over prior year.

Reported net income of $52.5 million includes an effective tax rate of 28.2% relative to our original expectations of 33%.

The lower tax rate in the quarter reflects a $3.7 million net tax benefit.

Slide 15 highlights the drivers of net interest margin versus prior quarter.

We achieved quarterly growth in average interest earning assets of $707 million or 3%.

The securities portfolio had average linked quarterly growth of $158 million from the completion of planned security purchases during Q1 associated with the HSA acquisition.

Cash flows totaled $430 million in the quarter with a yield of 304 basis points, which included $39 million of municipal bonds at 664 basis points.

Purchases totaled $512 million in the quarter at a yield of 250 basis points.

Portfolio interest income decreased by $900,000 versus prior quarter, due to a 13 basis point reduction in yield, which more than offset the increase in average balance.

We saw rates rise late in the quarter, but [TPRs] typically lag rate changes; and, therefore, increased from 13.9% to 15.8%.

This drove an increase in premium amortization expense by $1.9 million to $14.1 million.

Average loan balances grew $515 million, and the portfolio yield declined 2 basis points.

As a result, interest on our portfolio increased $4.9 million.

Average deposits increased $144 million, largely from growth in HSA deposits, with some offset from a seasonal decline in government deposits.

The rate on deposits was unchanged at 27 basis points.

Average borrowings increased $573 million in support of strong loan growth and to supplement the seasonal decline in government deposits.

The average cost decreased 24 basis points to 138 basis points, as the increase was in short-term FHLB borrowings at 24 basis points.

In summary, continued strong balance sheet growth, partially offset by NIM compression, resulted in a $3.7 million increase in net interest income to $163.5 million, and a net interest margin of 305 basis points.

On slide 16 we provide additional detail on core noninterest income, which increased $1.6 million or 3% versus prior quarter.

Mortgage banking revenue, the top box, increased $956,000 on settlement volume of $128 million, and a spread of 196 basis points.

Wealth and investment services, highlighted in gray, increased by $895,000 due to increased sales production during the quarter.

HSA Bank saw fee income growth of $1.1 million, both from new accounts and a full-quarter effect of the acquisition.

And other deposit service fees saw an increase of $660,000 from higher consumer activity during the quarter.

And other income decreased $1.7 million, primarily driven by lower volume of client swap activity.

Slide 17 highlights our core noninterest expense, which was up $4.1 million from Q1.

HSA Bank represented $1.2 million or almost 30% of the increase.

Of this, two-thirds was driven by higher volumes, and one-third as a result of the full-quarter impact of the acquisition.

Excluding HSA Bank, the remaining $2.9 million increase is a result of growth of compensation and benefits of $3.3 million from incentive-related and stock-based compensation expense, 14 additions in customer-facing positions, and higher quarter-over-quarter medical expense.

Other expense increased $2.6 million, reflecting the Q1 adjustment to our reserve for unfunded liabilities.

We also saw an offset from a reduction in occupancy expense, as Q1 included $1.8 million in snow removal expense.

Slide 18 highlights our ongoing expense discipline while continuing to invest in the business.

As you see, despite seasonal expenses, we continue to operate with an efficiency ratio at or below 60%, which we have now achieved for nine consecutive quarters.

Turning to slide 19, consistent with comments that I made at our Investor Day in June, Q2 saw a modest decrease in our asset sensitivity, mainly due to an increase in market rates during the quarter.

The 10-year swap rose 41 basis points, which increased our base case earnings projections and reduced our sensitivity through asset extension.

We continue to closely manage our asset sensitivity, and are well positioned for the anticipated rise in interest rates.

We have pushed back our assumption of a Fed rate increase to January 2016 and, like the market, believe that rate increases will be modest by historic standards.

Consequently, we booked more fixed-rate residential mortgage loans during the quarter, which increased interest income but also contributed to the reduction in our asset sensitivity.

We use our historical pricing betas in modeling deposit rate changes which coincide with the timing of Fed rate increases.

Upside potential exists for an additional 9.7% PPNR growth over the next 12 months if our managed deposit rates don't move for the first 50 basis points of Fed tightening.

This is also known as the [bull twister] scenario.

Turning now to slide 20, which highlights our asset quality metrics, nonperforming loans in the upper left increased to $168 million and were 1.14% of total loans.

The $16 million increase was mostly in middle market, where we have been operating at historically low levels.

We had very few outflows and a handful of inflows during the quarter.

The $16 million increase primarily reflects three credits, the largest of which is a $7 million credit that has already been restructured.

Appropriate charges have been taken, and we expect it to return to accrual before year end.

The two other credits are in various stages of resolution and have a very limited amount of potential loss.

Past-due loans in the upper right saw a decrease of $12.7 million with declines across each key category, and now represent 22 basis points of total loans.

Past due loans have declined 32% from a year ago, when they represented 36 basis points of total loans.

Commercial classified loans in the bottom left increased by $39 million.

One credit for $20 million cured in July to refinance.

Another credit for $13 million is in asset-based lending and we are fully secured.

We monitor the other credits closely and see these as discrete downgrades with no particular trend or industry issue.

Our annualized net charge-offs rate was 19 basis points on $6.9 million of net charge-offs in the quarter.

This represents the sixth consecutive quarter at or below 25 basis points.

Also worth noting, as seen on slide 47 in the supplemental section, is a 5% linked-quarter decline in TDRs.

The decline was led by commercial real estate, where TDRs now total $52 million compared to $66 million at March 31.

We continue to expect further improvement in consumer asset quality metrics, where there can be customarily quarterly variations in commercial metrics, given the nature of the business.

Slide 21 highlights our capital position.

Capital ratios remain well in excess of fully phased in Basel III well-capitalized levels, as well as our internal targets.

The tangible common equity ratio increased 7 basis points from March 31, and is around our internal target of 7.25% for this ratio.

The ratio had 13 basis points of benefit from the conversion to common of the remaining $28.9 million of our 8.5% convertible preferred issue.

A little over 1 million shares of common were issued under the conversion.

Since the conversion occurred on June 1, about 355,000 shares were included in the diluted share count in Q2.

Therefore, the average diluted share count will be about 700,000 shares higher in Q3.

The increase in diluted share count is offset by a $615,000 reduction in preferred dividend expense [per] quarter, resulting in no impact to EPS going forward.

The Common Equity Tier 1 ratio increased by 11 basis points to 11.04% and we continue with a longer-term target of 10% for this ratio.

Both capital ratios are down from last year due to the combination of strong asset growth in the HSA acquisition; and, for TCE, a reduction in AOCI due to an increased pension liability at year end.

Our strong capital position and solid earnings continues to support asset growth, provide for future increases in the dividend and selective buybacks, and enabled us to confidently meet the requirements of a 2015 Dodd-Frank Act stress test.

Also of note, we announced in April a 15% increase in our quarterly common dividend.

Before turning it back over to Jim, I will provide a few comments on our expectations for the third quarter.

Overall, average interest earning assets will grow approximately 2%, and we expect average loan growth to be up approximately 2% to 3%, with growth in all portfolios.

We now see less pressure on net interest margin.

Assuming the level of the 10-year swap and its spread to mortgage rates remains in today's range, we expect 0 to 2 basis point compression in Q3.

That being said, we expect an increase of $3 million to $4 million in net interest income.

Our credit indicators remain strong.

As such, we expect the Q3 provision to be in the range of the second quarter's level.

Regarding noninterest income, we expect an increase of $3 million to $4 million over Q2's core noninterest income of $59.4 million.

This will be driven by deposit service fees in wealth.

We anticipate our expense base will increase as a result of continued Bank-wide investments in people and technology.

That being said, we will continue to demonstrate a disciplined approach to investing, and expect to operate within core expenses at a targeted efficiency level of 60% or lower.

Our expected effective tax rate on a non-FTE basis should be between 33% and 34% going forward.

And we expect our average diluted share count to be in a range of 92 million shares, which incorporates the additional 700,000 shares from the convertible preferred conversion on June 1.

So with that, I will turn things back over to Jim.

Glenn, thank you.

And I want to thank so many of you on the phone today for attending our Investor Day back in June, where you heard about the success we've been having in investing capital and resources to support strategies that create value for customers and maximize economic profit over time.

We think we're making meaningful progress in our pursuit of high-performing status, and our momentum a strong.

Let's now open it up for comments and questions.

(Operator Instructions).

Jared Shaw, Wells Fargo.

Just a few questions for you.

The first, I guess if we look at the deposits and the decline in the money market and time, and then the offset growth in FHLB advances, was that a shift to try to extend the duration on liabilities?

Or was that more a reaction to deposit rates and being flexible?

Yes, Jared, it's Glenn.

That was more the seasonality in government banking, where we saw about a $0.5 billion reduction quarter-over-quarter.

Typical of Q2, so the FHLB borrowings short-term were provided for the loan growth.

Okay, okay.

So we should expect then to see, as government banking grows back, to see that shift back towards more of a deposit focus?

That's correct.

Okay.

And then when you talk about the mortgage banking and the originations increasing, is that more due to the strength of the market and keeping your market share there?

Or is that more of a push to take more market share and become more active in the area?

It's actually both.

As you know, the jumbo product can be a lead product in relationship development, consistent with our mass affluent strategy.

And so we've had a lot of success directly through our mortgage bankers and through our correspondent channels focusing on jumbo origination.

So we're seeing some share pickup as part of the program.

Most of it is purchased mortgages, and we think we're on target for success with the jumbo program.

Okay, great.

Thanks.

And then finally on the HSA side, you mentioned that in June you onboarded an employer with 60,000 accounts.

When you are seeing these large employers come over, are these typically employers that are already offering an HSA or a high-deductible healthcare plan to their employees, and you are taking that business away from somewhere else?

Or is this more a large employer will now begin to offer a high-deductible plan and you are stepping in as the first HSA provider?

It's actually both of those.

It may be an employer that had multiple solutions that wants to have an exclusive relationship with us.

It may be employers, and there are many of them, that are just starting to offer the program.

Or it may be an employer that's dissatisfied with their current arrangements.

But a lot of the volume is coming as a result of employers that are emphasizing this business more than they did before.

And so, as we look going out in the next few years, do you think that this will be really the new trend, where you start seeing more and more of the large employers coming onboard with tens of thousands of accounts?

We do think that will be a strong trend.

Okay, great.

Thank you.

Casey Haire, Jefferies.

Glenn, just wanted to follow up on the fee guide.

If I heard you correctly it was up $3 million to $4 million, led by wealth management and deposit charges.

It just feels a little bit aggressive.

Can you just maybe provide a little bit more color, particularly on the deposit side, given the secular pressures we're seeing elsewhere?

Yes, I think what we're seeing, Casey, is we saw some strong consumer volume in the second quarter.

And so, things like interchange and ATM certainly picked up.

And so we expect to see that continue into the third quarter.

And then with that in addition with the HSA, and the additional volume that's been booked quarter-to-date or year-to-date, is generating volume as well.

So that's really what's driving the deposit service charge number.

On the wealth side, you saw we made progress Q1 over Q2.

And, quite frankly, given the pipeline we have on the private bank and all the work that's being done on Webster Investment Services, we feel really confident about where we're going.

Okay.

If you look at the total increase, I'd say it's split between both of those.

Got you.

On services and wealth.

And the other income, I noticed you didn't call that out after a reset down from some nice swap income last quarter.

Is that a reasonable run rate going forward?

Yes.

Yes.

Casey, it's Joe.

The swap income numbers, that can be lumpy relative to the investment commercial real estate business that we originate.

Second quarter was a little soft for us.

We're not sure with respect to third quarter at this juncture.

But certainly it's an area that we really focus on, and it's part of keeping our balance sheet floating.

Let me add one comment to what Glenn was saying, too.

When you look at -- just take debit card transactions, for example: up by 16% year-over-year.

So that's part of where that --

That we've seen increases --

-- income is coming from.

-- in consumer activity on both the debit card and the ATM, just transaction volumes were up generally in the second quarter.

Got you.

And Casey, Joe.

It's again, I go back to the I-CRE side, it's really a function of whether or not we book the large transactions any particular quarter that will drive the swap, so that can get lumpy in a quarter for us.

Okay.

And just a question on overall efficiency.

Obviously you guys got a nice little run going here with keeping under 60%.

It is up year-over-year.

Obviously there's been investments being made on HSA.

Are you guys pulling forward a lot of those investments with some strong revenue numbers?

And we may expect to see some of these investments ease in the back half of the year?

Just trying to get a sense of where the HSA buildout expense is.

Yes, so, with regard to HSA there's a few dynamics in there, and the acquisition is one of them where we have a service agreement with JPMorgan.

And as we convert that onto our platform, that will begin to taper off, and so -- second quarter.

And that process will begin in the third quarter, so you'll start to see some fixed costs go away or costs associated with the TSA.

Partly offsetting that is the conversion that we've done on to the EV1 platform.

But generally I think the fixed costs will go down over the next couple of quarters in HSA.

Okay, great.

Thank you.

I want to add to that, that however, overall investments in the businesses will continue.

And the art of what we've been trying to achieve is to make those investments in support of our bankers and our businesses, and improving our technology at the same time as managing expenses in the disciplined way that we have to keep the ratio at 60% or better.

Mark Fitzgibbon, Sandler O'Neill.

First question I have for you was, are we likely to see any additional charges in coming quarters for branch and facilities optimization?

Or is that largely behind us at this point?

I think in -- it's not behind us.

We continue to rationalize the branch network, and in the third quarter I think you'll see another consolidation.

It's like a 3 to 1 type of deal, Mark.

But the team there continues to rationalize the branch network and reduce the footprint size.

Okay.

And then secondly, the nonperformers in the commercial non-mortgage portfolio jumped up again this quarter.

Could you tell us what's going on there?

Sure.

Mark, it's Joe.

I guess what I would say is more a return to a normalcy.

I think it would be -- we're -- inside the Bank, we see this as really a step coming perhaps closer to a normalized state, when you think about where our positions are.

So there isn't a concern that we have with respect to the portfolio.

We talk to the people about the flows.

There is really nothing there that would suggest that this is anything other than coming to a normalcy for our organization.

Joe, no particular industries?

No, no.

If implicit in that question is oil and gas, or they have been implicit in that is Shared National Credit, everything is running within normal bands for our particular business.

So, yes it is within the middle-market bank, but again, we really like where the classified and NPL levels are in the book.

Could they go down and get better from here?

Absolutely.

Could they go up a tad from here?

Absolutely.

So just -- but go ahead, Glenn.

I think you covered it.

As I did in my comments, I think we are at historically low levels in there.

And so it will bounce around as things -- and you see the trend, the flow: things coming in, being cured, things coming in -- back and forth.

So I think you will see some lumpiness in there.

Yes.

So Mark, I don't know whether you heard Glenn's comments on that specifically earlier, but what he was saying was that you get a handful in and you get some out.

We didn't get many coming out this time.

There were three loans accounting for $16 million, of which one, or half of it, already has been resolved.

That's right, Jim.

We've got a couple of classifieds.

One is just paid off in full.

One significant one was -- got additional capitalization, already been upgraded and approved.

So again, just -- we'd love you to think about our portfolio as having $10 million to $20 million to $30 million exposures that move around.

And we're at such a low state right now that any one of those makes a basis point move for us that might appear, on its face, material.

But again, just working with the guys just the other day, and working with our Dan Bley, we just don't see it.

We don't see anything here that would suggest that there is anything other than a bump along for the foreseeable future.

Right.

Overall loan quality is very good.

And one other point I think we noted was that TDRs declined in the quarter also.

Right.

And then you look at the days past due in the commercial or the consumer book, and those levels are still declining.

Thank you.

Dave Rochester, Deutsche Bank.

Nice loan growth this quarter.

So given that strong growth on the loan side, the average pace you are guiding to seems to imply a little bit of a slower growth pace in 3Q.

Maybe if you could just comment on that.

And also on why the provision should remain in this 2Q range if loan growth might slow.

Yes, so I think -- let me start and I'll hand it over to Joe.

But with regard to loan growth on the consumer side, you saw a significant growth quarter-over-quarter, and that was -- some of that was a reflection of the market rates.

We had seen apps slow down a little since the first quarter, so that's factored into our thinking here on the residential side.

And on the commercial side, I'll let Joe touch --.

Hey, Dave.

Certainly the good news is that Webster has been investing in our people and our markets for some period of time.

So we like to think that we've got more good athletes in various markets helping us do well.

But in fact what happened in this particular quarter that we think will happen in the next quarter is some growth, which we had expected to see in Q2 quite frankly on the pre-pay side.

And I'll be even more specific with respect to our I-CRE book.

So, that should have happened in Q2.

It probably will happen in Q3, and so how Glenn guided you is probably appropriate.

Now, we'd love to surprise a tad on the upside to that, but our guess is we think that's fair guidance for you.

Perfect, thanks.

And then as that relates to the provision, if loans are going to grow slower, why not a lower provision?

Well, that's a -- we've run it through our model, so it's not -- it depends on each portfolio.

And that's where we are right now; once we get the loan growth, and we look at our existing portfolio.

And that's how we ended up being in the range of where we are today.

As we indicated in the past, we like to be anywhere from 1.10 coverage to 1.15, and the model informs us about where we are.

So it's going to depend on where the growth comes during the quarter, as well as the existing portfolio.

But he's right: we're guiding to the same, but it could be lower.

Yes.

Could be higher, too, right?

Could be higher; could be lower.

Got you.

And then just a bigger-picture question on the efficiency ratio.

It seems like you're talking about a lot of revenue growth in 3Q, and I know you are reiterating that 60% or lower on the efficiency ratio.

Shouldn't we expect to see that ratio decline over time as the JPMorgan expenses come out?

And then you've got the fee and the income growth and the balance sheet growth continuing.

Well, sure.

That would be the plan, would be that over time -- and we've talked about this -- we ought to be able to get it down.

What we're trying to be careful about is to continue to invest in our businesses, so it's not all a save.

It creates opportunity, that revenue growth, to not only manage efficiently but to invest in the businesses.

So we're just trying to achieve that balance.

And that's why we're saying at this point, on just a single forward quarter basis, that we think we can keep it under 60%.

Over time we think we can drive it down and invest in our businesses.

Great.

And can you guys just remind us how much in the way of net savings you expect to get as that TSA rolls off through the first quarter of next year?

It's about $2 million a quarter, somewhere around there.

$2 million on a quarterly run rate basis?

Yes.

Great.

And then just one last one on your margin guidance.

What are you assuming for a securities premium [am] expense?

Are you assuming that that increase we saw this quarter unwinds over the next couple of quarters?

From a premium standpoint, we think it will be about flat quarter-over-quarter.

So flat is baked into 0 to 2 down?

Yes.

Great.

All right.

Thanks, guys.

Bob Ramsey, FBR Capital Markets.

This is Martin Terskin for Bob Ramsey.

Could you provide some color around the compensation expense increase?

Was it all HSA-related, or is there something else?

No.

HSA is part of it, but we did add staff, a customer-facing staff.

And more significantly is we go through our annual incentive comp cycle at the beginning of the second quarter, so you get a full quarter of that.

So, if you look at base comp, all things being equal, you would expect that to go up about 2% on an annual basis.

That's driving it.

And then the last piece, which is worth a couple hundred thousand dollars as well to that number, as you saw, our stock price went up about $2.50 quarter-over-quarter, and the accounting for that probably is worth about $600,000 to $700,000 for the quarter.

Okay.

Thank you.

The next question that I have is, what was the reason for the other income dropping by roughly $2 million?

The other income included -- I think as we highlighted in the first quarter call -- first quarter over second quarter, swap volume was about half of where it was in the second quarter.

And I think Joe just hit that.

Yes, that's correct.

Got it.

And I guess lastly, I saw the occupancy expense decrease quite dramatically.

And was that due to your facility optimization efforts?

And do you think this is a good run rate, or is it more of a one-time thing?

We had less snow in the second quarter (laughter).

No, seriously, we had about $1.8 million in snow removal expense in the first quarter.

So you can call that seasonal, I guess.

That's all a driver.

Got it.

Thank you very much.

David Darst, Guggenheim.

Maybe you could talk about competition in the HSA business.

And in a rising rate environment or in any other scenario, why would other providers not raise deposit pricing to either maintain or grow their portfolios that a faster rate?

Well, they could.

I think that, again, it's the balance there.

I would say that most providers of HSA accounts are less concerned with the deposit rate than they are with the quality of the service they're getting from their partner; and the technology, the platform, the experience that their employees are having.

So, we'll just have to see what happens in a rising rate environment.

But we believe that these purpose-driven, long-duration, low-cost deposits are not going to have a high elasticity going forward.

We'll just have to see, but that's our view.

And to the extent that that does become a competitive factor in terms of what the rates are that are paid, we'll be sensitive to that.

But at this point that hasn't been the driver.

Okay.

And then in the same line, in the brokerage space or in the money market alternatives, could you also see that influencing your beta, and it would be higher than you expect?

We could, but we've tried to plan for that in our projections.

If you were to grow that broker business, would it change your economics?

Well, you're saying where we're sweeping to the investment accounts?

That's right.

Off-balance-sheet.

No, we actually -- we have planned for that activity.

I think you probably know we have $1 billion right now that is managed in that fashion.

So there's trade-offs.

There's obviously less expense that's involved.

There could be nominally lower revenue as well, but we look at it as part of the overall program.

Yes, and David, they typically have higher balances, deposit balances, as well, those that sweep into investments.

Okay.

(multiple speakers) we don't think it will have a meaningful impact.

Okay.

And then just you've outlined what you're going to be spending on risk management this year, and then also in the digital space and infrastructure.

Is that already in the run rate in the second quarter, or is that going to be building up and then offsetting some of the gains you've got going forward?

Yes.

David, that's in the run rate for the quarter.

There will always be additional capital spends, particularly with respect to mobile banking and online expenditures like that, but the risk piece is all in our run rate.

Okay, great.

Okay, thank you.

Matthew Kelley, Piper Jaffray.

Just the first question on the jumbo mortgage business that you've been building out.

Just remind us on rate and term.

And I know it's about 25%, 26% of loans, where that could go over the next couple of years here.

So, it's primarily 30-year jumbos at about 4%.

And as far as projections, I think that's going to be subject to where the rate environment is.

Yes, it's the rate environment.

It's how we want to manage the balance sheet; interest rate sensitivity -- all those factors come together.

But it really is a great relationship development tool and very, very high quality with a decent return.

And our mortgage customers have six products with us.

It's not just about the mortgage loan.

It's about relationship development.

It's consistent with the mass affluent strategy.

This is all positive.

Got it.

Similar type of growth for third quarter, back half of the year?

Not off the second quarter.

I think you'll see it taper down a little bit.

Yes.

Okay.

And then on the securities book, $7.1 billion in total balance -- where do you see that interest in terms of size over the next year?

We see it staying relatively flat for the next year.

Okay.

And then you are in a good position obviously with the HSA deposit business driving nice balance growth there at pretty low rates.

But what are you seeing across your markets for deposit cost trends?

Some of your competitors have much higher loan to deposit ratios, and have to be a little bit more competitive on money market, high-yield savings.

What have you seen across each of your markets on deposit pricing during the quarter and more recently?

We have noticed a little bit of percolation.

Some of the community banks have been pushing rate a little bit.

Some of the larger banks have been having specials that they've provided, so we're tuned into it.

We have our own set of specials we could offer.

We haven't felt too much pressure at this point.

We haven't seen much uptick in overall cost of deposits.

In fact, in some cases, we have been able to continue to drive it down.

So we're alert to it; but, as yet, it has not created a major event.

Okay.

And one question on expenses.

Your FDIC insurance ticked down a little bit.

Assessment rate is 10 basis points.

Is that where it should stay for the next year or two?

Yes, it will stay around that.

Around that level.

And then you mentioned capital.

I think it was a 7.25 TCE ratio target.

Do you see any need for capital raising to support growth over the next 12 to 18 months, or internal capital generation should be sufficient?

Yes, I think we're good with that over -- as we look out over 12 months.

Okay.

All right, thank you.

Mr. Smith, it appears we have no further questions at this time.

I would now like to turn the floor back over to you for closing comments.

Thanks, Christine.

Thank you all for being with us today.

Have a good day.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.